What FirstGroup plc's (LON:FGP) P/S Is Not Telling You

With a median price-to-sales (or "P/S") ratio of close to 0.4x in the Transportation industry in the United Kingdom, you could be forgiven for feeling indifferent about FirstGroup plc's (LON:FGP) P/S ratio of 0.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for FirstGroup

How FirstGroup Has Been Performing

While the industry has experienced revenue growth lately, FirstGroup's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think FirstGroup's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like FirstGroup's to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period was better as it's delivered a decent 9.2% overall rise in revenue. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 17% each year as estimated by the six analysts watching the company. With the industry predicted to deliver 3.2% growth each year, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that FirstGroup's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

While FirstGroup's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

You always need to take note of risks, for example - FirstGroup has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.